CHARLES F.

WOODHOUSE, plaintiff-appellant,
vs.
FORTUNATO F. HALILI, defendant-appellant.
Taada, Pelaez & Teehankee for defendant and appellant.
Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.
LABRADOR, J.:
On November 29, 1947, the plaintiff entered on a written
agreement, Exhibit A, with the defendant, the most important
provisions of which are (1) that they shall organize a partnership
for the bottling and distribution of Mision soft drinks, plaintiff to act
as industrial partner or manager, and the defendant as a
capitalist, furnishing the capital necessary therefor; (2) that the
defendant was to decide matters of general policy regarding the
business, while the plaintiff was to attend to the operation and
development of the bottling plant; (3) that the plaintiff was to
secure the Mission Soft Drinks franchise for and in behalf of the
proposed partnership; and (4) that the plaintiff was to receive 30
per cent of the net profits of the business. The above agreement
was arrived at after various conferences and consultations by and
between them, with the assistance of their respective attorneys.
Prior to entering into this agreement, plaintiff had informed the
Mission Dry Corporation of Los Angeles, California, U.S.A.,
manufacturers of the bases and ingridients of the beverages
bearing its name, that he had interested a prominent financier
(defendant herein) in the business, who was willing to invest half
a million dollars in the bottling and distribution of the said
beverages, and requested, in order that he may close the deal
with him, that the right to bottle and distribute be granted him for a
limited time under the condition that it will finally be transferred to
the corporation (Exhibit H). Pursuant for this request, plaintiff was
given "a thirty-days" option on exclusive bottling and distribution
rights for the Philippines" (Exhibit J). Formal negotiations between
plaintiff and defendant began at a meeting on November 27,
1947, at the Manila Hotel, with their lawyers attending. Before this
meeting plaintiff's lawyer had prepared the draft of the agreement,
Exhibit II or OO, but this was not satisfactory because a
partnership, instead of a corporation, was desired. Defendant's
lawyer prepared after the meeting his own draft, Exhibit HH. This
last draft appears to be the main basis of the agreement, Exhibit
A.
The contract was finally signed by plaintiff on December 3, 1947.
Plaintiff did not like to go to the United States without the
agreement being not first signed. On that day plaintiff and
defendant went to the United States, and on December 10, 1947,
a franchise agreement (Exhibit V) was entered into the Mission
Dry Corporation and Fortunato F. Halili and/or Charles F.
Woodhouse, granted defendant the exclusive right, license, and
authority to produce, bottle, distribute, and sell Mision beverages
in the Philippines. The plaintiff and the defendant thereafter
returned to the Philippines. Plaintiff reported for duty in January,
1948, but operations were not begun until the first week of
February, 1948. In January plaintiff was given as advance, on
account of profits, the sum of P2,000, besides the use of a car; in
February, 1948, also P2,000, and in March only P1,000. The car
was withdrawn from plaintiff on March 9, 1948.
When the bottling plant was already on operation, plaintiff
demanded of defendant that the partnership papers be executed.
At first defendant executed himself, saying there was no hurry.
Then he promised to do so after the sales of the product had
been increased to P50,000. As nothing definite was forthcoming,
after this condition was attained, and as defendant refused to give
further allowances to plaintiff, the latter caused his attorneys to
take up the matter with the defendant with a view to a possible
settlement. as none could be arrived at, the present action was
instituted.
In his complaint plaintiff asks for the execution of the contract of
partnership, an accounting of the profits, and a share thereof of
30 per cent, as well as damages in the amount of P200,000. In
his answer defendant alleges by way of defense (1) that
defendant's consent to the agreement, Exhibit A, was secured by
the representation of plaintiff that he was the owner, or was about
to become owner of an exclusive bottling franchise, which
representation was false, and plaintiff did not secure the
franchise, but was given to defendant himself; (2) that defendant
did not fail to carry out his undertakings, but that it was plaintiff
who failed; (3) that plaintiff agreed to contribute the exclusive
franchise to the partnership, but plaintiff failed to do so. He also
presented a counter-claim for P200,000 as damages. On these
issues the parties went to trial, and thereafter the Court of First
Instance rendered judgment ordering defendant to render an
accounting of the profits of the bottling and distribution business,
subject of the action, and to pay plaintiff 15 percent thereof. it held
that the execution of the contract of partnership could not be
enforced upon the parties, but it also held that the defense of
fraud was not proved. Against this judgment both parties have
appealed.
The most important question of fact to be determined is whether
defendant had falsely represented that he had an exclusive
franchise to bottle Mission beverages, and whether this false
representation or fraud, if it existed, annuls the agreement to form
the partnership. The trial court found that it is improbable that
defendant was never shown the letter, Exhibit J, granting plaintiff
had; that the drafts of the contract prior to the final one can not be
considered for the purpose of determining the issue, as they are
presumed to have been already integrated into the final
agreement; that fraud is never presumed and must be proved;
that the parties were represented by attorneys, and that if any
party thereto got the worse part of the bargain, this fact alone
would not invalidate the agreement. On this appeal the defendant,
as appellant, insists that plaintiff did represent to the defendant
that he had an exclusive franchise, when as a matter of fact, at
the time of its execution, he no longer had it as the same had
expired, and that, therefore, the consent of the defendant to the
contract was vitiated by fraud and it is, consequently, null and
void.
Our study of the record and a consideration of all the surrounding
circumstances lead us to believe that defendant's contention is
not without merit. Plaintiff's attorney, Mr. Laurea, testified that
Woodhouse presented himself as being the exclusive grantee of a
franchise, thus:
A. I don't recall any discussion about that matter. I took along
with me the file of the office with regards to this matter. I
notice from the first draft of the document which I prepared
which calls for the organization of a corporation, that the
manager, that is, Mr. Woodhouse, is represented as being
the exclusive grantee of a franchise from the Mission Dry
Corporation. . . . (t.s.n., p.518)
As a matter of fact, the first draft that Mr. Laurea prepared, which
was made before the Manila Hotel conference on November 27th,
expressly states that plaintiff had the exclusive franchise. Thus,
the first paragraph states:
Whereas, the manager is the exclusive grantee of a
franchise from the Mission Dry Corporation San Francisco,
California, for the bottling of Mission products and their sale
to the public throughout the Philippines; . . . .
3. The manager, upon the organization of the said
corporation, shall forthwith transfer to the said corporation
his exclusive right to bottle Mission products and to sell them
throughout the Philippines. . . . .
(Exhibit II; emphasis ours)
The trial court did not consider this draft on the principle of
integration of jural acts. We find that the principle invoked is
inapplicable, since the purpose of considering the prior draft is not
to vary, alter, or modify the agreement, but to discover the intent
of the parties thereto and the circumstances surrounding the
execution of the contract. The issue of fact is: Did plaintiff
represent to defendant that he had an exclusive franchise?
Certainly, his acts or statements prior to the agreement are
essential and relevant to the determination of said issue. The act
or statement of the plaintiff was not sought to be introduced to
change or alter the terms of the agreement, but to prove how he
induced the defendant to enter into it to prove the
representations or inducements, or fraud, with which or by which
he secured the other party's consent thereto. These are expressly
excluded from the parol evidence rule. (Bough and Bough vs.
Cantiveros and Hanopol, 40 Phil., 209; port Banga Lumber
Co. vs. Export & Import Lumber Co., 26 Phil., 602; III Moran
221,1952 rev. ed.) Fraud and false representation are an incident
to the creation of a jural act, not to its integration, and are not
governed by the rules on integration. Were parties prohibited from
proving said representations or inducements, on the ground that
the agreement had already been entered into, it would be
impossible to prove misrepresentation or fraud. Furthermore, the
parol evidence rule expressly allows the evidence to be
introduced when the validity of an instrument is put in issue by the
pleadings (section 22, par. (a), Rule 123, Rules of Court),as in
this case.
That plaintiff did make the representation can also be easily
gleaned from his own letters and his own testimony. In his letter to
Mission Dry Corporation, Exhibit H, he said:.
. . . He told me to come back to him when I was able to
speak with authority so that we could come to terms as far
as he and I were concerned. That is the reason why the
cable was sent. Without this authority, I am in a poor
bargaining position. . .
I would propose that you grant me the exclusive bottling and
distributing rights for a limited period of time, during which I
may consummate my plants. . . .
By virtue of this letter the option on exclusive bottling was given to
the plaintiff on October 14, 1947. (See Exhibit J.) If this option for
an exclusive franchise was intended by plaintiff as an instrument
with which to bargain with defendant and close the deal with him,
he must have used his said option for the above-indicated
purpose, especially as it appears that he was able to secure,
through its use, what he wanted.
Plaintiff's own version of the preliminary conversation he had with
defendant is to the effect that when plaintiff called on the latter,
the latter answered, "Well, come back to me when you have the
authority to operate. I am definitely interested in the bottling
business." (t. s. n., pp. 60-61.) When after the elections of 1949
plaintiff went to see the defendant (and at that time he had
already the option), he must have exultantly told defendant that
he had the authority already. It is improbable and incredible for
him to have disclosed the fact that he had only an optionto the
exclusive franchise, which was to last thirty days only, and still
more improbable for him to have disclosed that, at the time of the
signing of the formal agreement, his option had already expired.
Had he done so, he would have destroyed all his bargaining
power and authority, and in all probability lost the deal itself.
The trial court reasoned, and the plaintiff on this appeal argues,
that plaintiff only undertook in the agreement "to secure the
Mission Dry franchise for and in behalf of the proposed
partnership." The existence of this provision in the final
agreement does not militate against plaintiff having represented
that he had the exclusive franchise; it rather strengthens belief
that he did actually make the representation. How could plaintiff
assure defendant that he would get the franchise for the latter if
he had not actually obtained it for himself? Defendant would not
have gone into the business unless the franchise was raised in
his name, or at least in the name of the partnership. Plaintiff
assured defendant he could get the franchise. Thus, in the draft
prepared by defendant's attorney, Exhibit HH, the above provision
is inserted, with the difference that instead of securing the
franchise for the defendant, plaintiff was to secure it for the
partnership. To show that the insertion of the above provision
does not eliminate the probability of plaintiff representing himself
as the exclusive grantee of the franchise, the final agreement
contains in its third paragraph the following:
. . . and the manager is ready and willing to allow the
capitalists to use the exclusive franchise . . .
and in paragraph 11 it also expressly states:
1. In the event of the dissolution or termination of the
partnership, . . . the franchise from Mission Dry Corporation
shall be reassigned to the manager.
These statements confirm the conclusion that defendant believed,
or was made to believe, that plaintiff was the grantee of an
exclusive franchise. Thus it is that it was also agreed upon that
the franchise was to be transferred to the name of the
partnership, and that, upon its dissolution or termination, the
same shall be reassigned to the plaintiff.
Again, the immediate reaction of defendant, when in California he
learned that plaintiff did not have the exclusive franchise, was to
reduce, as he himself testified, plaintiff's participation in the net
profits to one half of that agreed upon. He could not have had
such a feeling had not plaintiff actually made him believe that he
(plaintiff) was the exclusive grantee of the franchise.
The learned trial judge reasons in his decision that the assistance
of counsel in the making of the contract made fraud improbable.
Not necessarily, because the alleged representation took place
before the conferences were had, in other words, plaintiff had
already represented to defendant, and the latter had already
believed in, the existence of plaintiff's exclusive franchise before
the formal negotiations, and they were assisted by their lawyers
only when said formal negotiations actually took place.
Furthermore, plaintiff's attorney testified that plaintiff had said that
he had the exclusive franchise; and defendant's lawyer testified
that plaintiff explained to him, upon being asked for the franchise,
that he had left the papers evidencing it.(t.s.n., p. 266.)
We conclude from all the foregoing that plaintiff did actually
represent to defendant that he was the holder of the exclusive
franchise. The defendant was made to believe, and he actually
believed, that plaintiff had the exclusive franchise. Defendant
would not perhaps have gone to California and incurred expenses
for the trip, unless he believed that plaintiff did have that exclusive
privilege, and that the latter would be able to get the same from
the Mission Dry Corporation itself. Plaintiff knew what defendant
believed about his (plaintiff's) exclusive franchise, as he induced
him to that belief, and he may not be allowed to deny that
defendant was induced by that belief. (IX Wigmore, sec. 2423;
Sec. 65, Rule 123, Rules of Court.)
We now come to the legal aspect of the false representation.
Does it amount to a fraud that would vitiate the contract? It must
be noted that fraud is manifested in illimitable number of degrees
or gradations, from the innocent praises of a salesman about the
excellence of his wares to those malicious machinations and
representations that the law punishes as a crime. In
consequence, article 1270 of the Spanish Civil Code distinguishes
two kinds of (civil) fraud, the causal fraud, which may be a ground
for the annulment of a contract, and the incidental deceit, which
only renders the party who employs it liable for damages. This
Court had held that in order that fraud may vitiate consent, it must
be the causal (dolo causante), not merely the incidental (dolo
causante), inducement to the making of the contract. (Article
1270, Spanish Civil Code; Hill vs. Veloso, 31 Phil. 160.) The
record abounds with circumstances indicative that the fact that the
principal consideration, the main cause that induced defendant to
enter into the partnership agreement with plaintiff, was the ability
of plaintiff to get the exclusive franchise to bottle and distribute for
the defendant or for the partnership. The original draft prepared
by defendant's counsel was to the effect that plaintiff obligated
himself to secure a franchise for the defendant. Correction
appears in this same original draft, but the change is made not as
to the said obligation but as to the grantee. In the corrected draft
the word "capitalist"(grantee) is changed to "partnership." The
contract in its final form retains the substituted term "partnership."
The defendant was, therefore, led to the belief that plaintiff had
the exclusive franchise, but that the same was to be secured for
or transferred to the partnership. The plaintiff no longer had the
exclusive franchise, or the option thereto, at the time the contract
was perfected. But while he had already lost his option thereto
(when the contract was entered into), the principal obligation that
he assumed or undertook was to secure said franchise for the
partnership, as the bottler and distributor for the Mission Dry
Corporation. We declare, therefore, that if he was guilty of a false
representation, this was not the causal consideration, or the
principal inducement, that led plaintiff to enter into the partnership
agreement.
But, on the other hand, this supposed ownership of an exclusive
franchise was actually the consideration or price plaintiff gave in
exchange for the share of 30 percent granted him in the net
profits of the partnership business. Defendant agreed to give
plaintiff 30 per cent share in the net profits because he was
transferring his exclusive franchise to the partnership. Thus, in the
draft prepared by plaintiff's lawyer, Exhibit II, the following
provision exists:
3. That the MANAGER, upon the organization of the said
corporation, shall forthwith transfer to the said
corporation his exclusive right to bottle Mission products and
to sell them throughout the Philippines. As a consideration
for such transfer, the CAPITALIST shall transfer to the
Manager fully paid non assessable shares of the said
corporation . . . twenty-five per centum of the capital stock of
the said corporation. (Par. 3, Exhibit II; emphasis ours.)
Plaintiff had never been a bottler or a chemist; he never had
experience in the production or distribution of beverages. As a
matter of fact, when the bottling plant being built, all that he
suggested was about the toilet facilities for the laborers.
We conclude from the above that while the representation that
plaintiff had the exclusive franchise did not vitiate defendant's
consent to the contract, it was used by plaintiff to get from
defendant a share of 30 per cent of the net profits; in other words,
by pretending that he had the exclusive franchise and promising
to transfer it to defendant, he obtained the consent of the latter to
give him (plaintiff) a big slice in the net profits. This is the dolo
incidentedefined in article 1270 of the Spanish Civil Code,
because it was used to get the other party's consent to a big
share in the profits, an incidental matter in the agreement.
El dolo incidental no es el que puede producirse en el
cumplimiento del contrato sino que significa aqui, el que
concurriendoen el consentimiento, o precediendolo, no
influyo para arrancar porsi solo el consentimiento ni en la
totalidad de la obligacion, sinoen algun extremo o accidente
de esta, dando lugar tan solo a una accion para reclamar
indemnizacion de perjuicios. (8 Manresa 602.)
Having arrived at the conclusion that the agreement may not be
declared null and void, the question that next comes before us is,
May the agreement be carried out or executed? We find no merit
in the claim of plaintiff that the partnership was already a fait
accompli from the time of the operation of the plant, as it is
evident from the very language of the agreement that the parties
intended that the execution of the agreement to form a
partnership was to be carried out at a later date. They expressly
agreed that they shall form a partnership. (Par. No. 1, Exhibit A.)
As a matter of fact, from the time that the franchise from the
Mission Dry Corporation was obtained in California, plaintiff
himself had been demanding that defendant comply with the
agreement. And plaintiff's present action seeks the enforcement
of this agreement. Plaintiff's claim, therefore, is both inconsistent
with their intention and incompatible with his own conduct and
suit.
As the trial court correctly concluded, the defendant may not be
compelled against his will to carry out the agreement nor execute
the partnership papers. Under the Spanish Civil Code, the
defendant has an obligation to do, not to give. The law recognizes
the individual's freedom or liberty to do an act he has promised to
do, or not to do it, as he pleases. It falls within what Spanish
commentators call a very personal act (acto personalismo), of
which courts may not compel compliance, as it is considered an
act of violence to do so.
Efectos de las obligaciones consistentes en hechos
personalismo.Tratamos de la ejecucion de las
obligaciones de hacer en el solocaso de su incumplimiento
por parte del deudor, ya sean los hechos personalisimos, ya
se hallen en la facultad de un tercero; porque el
complimiento espontaneo de las mismas esta regido por los
preceptos relativos al pago, y en nada les afectan las
disposiciones del art. 1.098.
Esto supuesto, la primera dificultad del asunto consiste en
resolver si el deudor puede ser precisado a realizar el hecho
y porque medios.
Se tiene por corriente entre los autores, y se traslada
generalmente sin observacion el principio romanonemo
potest precise cogi ad factum. Nadie puede ser obligado
violentamente a haceruna cosa. Los que perciben la
posibilidad de la destruccion deeste principio, aaden que,
aun cuando se pudiera obligar al deudor, no deberia
hacerse, porque esto constituiria una violencia, y noes la
violenciamodo propio de cumplir las obligaciones (Bigot,
Rolland, etc.). El maestro Antonio Gomez opinaba lo mismo
cuandodecia que obligar por la violencia seria infrigir la
libertad eimponer una especie de esclavitud.
x x x x x x x x x
En efecto; las obligaciones contractuales no se acomodan
biencon el empleo de la fuerza fisica, no ya precisamente
porque seconstituya de este modo una especie de
esclavitud, segun el dichode Antonio Gomez, sino porque se
supone que el acreedor tuvo encuenta el caracter
personalisimo del hecho ofrecido, y calculo sobre
laposibilidad de que por alguna razon no se realizase.
Repugna,ademas, a la conciencia social el empleo de la
fuerza publica, mediante coaccion sobre las personas, en
las relaciones puramente particulares; porque la evolucion
de las ideas ha ido poniendo masde relieve cada dia el
respeto a la personalidad humana, y nose admite bien la
violencia sobre el individuo la cual tiene caracter
visiblemente penal, sino por motivos que interesen a la
colectividad de ciudadanos. Es, pues, posible y licita esta
violencia cuando setrata de las obligaciones que hemos
llamado ex lege, que afectanal orden social y a la entidad de
Estado, y aparecen impuestas sinconsideracion a las
conveniencias particulares, y sin que por estemotivo puedan
tampoco ser modificadas; pero no debe serlo cuandola
obligacion reviste un interes puramente particular, como
sucedeen las contractuales, y cuando, por consecuencia,
paraceria salirseel Estado de su esfera propia, entrado a
dirimir, con apoyo dela fuerza colectiva, las diferencias
producidas entre los ciudadanos. (19 Scaevola 428, 431-
432.)
The last question for us to decide is that of damages,damages
that plaintiff is entitled to receive because of defendant's refusal to
form the partnership, and damages that defendant is also entitled
to collect because of the falsity of plaintiff's representation. (Article
1101, Spanish Civil Code.) Under article 1106 of the Spanish Civil
Code the measure of damages is the actual loss suffered and the
profits reasonably expected to be received, embraced in the
terms dao emergente and lucro cesante. Plaintiff is entitled
under the terms of the agreement to 30 per cent of the net profits
of the business. Against this amount of damages, we must set off
the damage defendant suffered by plaintiff's misrepresentation
that he had obtained a very high percentage of share in the
profits. We can do no better than follow the appraisal that the
parties themselves had adopted.
When defendant learned in Los Angeles that plaintiff did not have
the exclusive franchise which he pretended he had and which he
had agreed to transfer to the partnership, his spontaneous
reaction was to reduce plaintiff's share form 30 per cent to 15 per
cent only, to which reduction defendant appears to have readily
given his assent. It was under this understanding, which amounts
to a virtual modification of the contract, that the bottling plant was
established and plaintiff worked as Manager for the first three
months. If the contract may not be considered modified as to
plaintiff's share in the profits, by the decision of defendant to
reduce the same to one-half and the assent thereto of plaintiff,
then we may consider the said amount as a fair estimate of the
damages plaintiff is entitled to under the principle enunciated in
the case of Varadero de Manila vs. Insular Lumber Co., 46 Phil.
176. Defendant's decision to reduce plaintiff's share and plaintiff's
consent thereto amount to an admission on the part of each of the
reasonableness of this amount as plaintiff's share. This same
amount was fixed by the trial court. The agreement contains the
stipulation that upon the termination of the partnership, defendant
was to convey the franchise back to plaintiff (Par. 11, Exhibit A).
The judgment of the trial court does not fix the period within which
these damages shall be paid to plaintiff. In view of paragraph 11
of Exhibit A, we declare that plaintiff's share of 15 per cent of the
net profits shall continue to be paid while defendant uses the
franchise from the Mission Dry Corporation.
With the modification above indicated, the judgment appealed
from is hereby affirmed. Without costs.
Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo
and Bautista Angelo, JJ., concur.